Feature

Downturns offer a rare opportunity to outmaneuver rivals. But to do so, you must first systematically assess your organization’s ability to weather the storm and take corrective action. David Rhodes and Daniel Stelter, of the Boston Consulting Group, offer a comprehensive approach to tackling this simultaneously defensive and offensive challenge. For some companies, the outcome of this process will be a program of immediate actions that represent a turbocharged version of business as usual. For others, it will be a painful realization that nothing short of an urgent corporate turnaround will suffice.

To stabilize the business, companies must (1) protect their financial fundamentals by, for example, monitoring and maximizing cash flow, managing customer credit risk, reducing working capital, and optimizing their financial structure and financing options; (2) protect their existing business operations by reducing costs, increasing organizational efficiency, aggressively managing the top line, rethinking their product portfolio and pricing, reining in investment plans, and divesting noncore businesses; and (3) work to maximize their valuation relative to rivals by being proactive in their investor relations and favoring dividends over share buybacks.

To seize advantage, companies must make farsighted investments, identify opportunistic and potentially transformative mergers, and consider possible redefinitions of their business models.

This recession handbook will help companies not only to survive the recession but also to thrive in its aftermath.

Decision making lies at the heart of our personal and professional lives. Yet the daunting reality is that enormously important decisions made by intelligent, responsible people with the best information and intentions are nevertheless hopelessly flawed at times. In part, that’s due to the way our brains work. Modern neuroscience teaches us that two hardwired processes in the brain—pattern recognition and emotional tagging—are critical to decision making. Both are normally reliable; indeed, they provide us with an evolutionary advantage. But in certain circumstances, either one can trip us up and skew our judgment. In this article, Campbell and Whitehead, directors at the Ashridge Strategic Management Centre, together with Finkelstein, of Dartmouth’s Tuck School, describe the conditions that promote errors of judgment and explore how organizations can build safeguards against them into the decision-making process.

In their analysis, the authors delineate three “red-flag conditions” that are responsible either for distorting emotional tagging or for encouraging people to see false patterns: conflicts of interest; attachments to people, places, or things; and the presence of misleading memories, which seem, but really are not, relevant and comparable to the current situation. Using a global chemical company as an example, the authors describe the steps leaders can take to counteract those biases: inject fresh experience or analysis, introduce further debate and more challenges to their thinking, and impose stronger governance. Rather than rely on the wisdom of experienced chairmen, the humility of CEOs, or the standard organizational checks and balances, the authors urge, everyone involved in important decisions should explicitly consider whether red flags exist and, if they do, lobby for appropriate safeguards.

Managers regularly implement new ideas without evidence to back them up. They act on hunches and often learn very little along the way. That doesn’t have to be the case. With the help of broadly available software and some basic investments in building capabilities, managers don’t need a PhD in statistics to base consequential decisions on scientifically sound experiments.

Some companies with rich consumer-transaction data—Toronto-Dominion, CKE Restaurants, eBay, and others—are routinely testing innovations well outside the realm of product R&D. As randomized testing becomes standard procedure in certain settings (website analysis, for instance), firms learn to apply it in other areas as well. Entire organizations that adopt a “test and learn” culture stand to realize the greatest benefits.

That said, firms need to determine when formal testing makes sense. Generally, it’s much more applicable to tactical decisions (such as choosing a new store format) than to strategic ones (such as figuring out whether to acquire a business). Tests are useful only if managers define and measure desired outcomes and formulate logical hypotheses about how proposed interventions will play out.

To begin incorporating more scientific management into your business, acquaint managers at all levels with your organization’s testing process. A shared understanding of what constitutes a valid test—and how it jibes with other processes—helps executives to set expectations and innovators to deliver on them. The process always begins with creating a testable hypothesis. Then the details of the test are designed, which means identifying sites or units to be tested, selecting control groups, and defining test and control situations. After the test is carried out for a specified period, managers analyze the data to determine results and appropriate actions. Results ideally go into a “learning library,” so others can benefit from them.

Competing in volatile markets feels a lot like boxing: Punches come from all directions; strategies change constantly; and one powerful blow could knock out your company at any moment. As firms fight their way through tumultuous times, they can learn much from boxing champions.

London Business School professor Donald Sull outlines two fundamental approaches to mastering uncertainty—agility and absorption—using the classic “Rumble in the Jungle” between Muhammad Ali and George Foreman to illustrate them. Both capabilities can help companies survive turmoil.

Agility, exemplified by Ali, is the ability to quickly spot and exploit opportunities. It comes in one of three forms: operational agility, the capacity to seize opportunities to improve operations and processes within a focused business model; portfolio agility, the ability to shift resources out of less-promising units and into attractive ones; and strategic agility, the ability to jump on game-changing opportunities. Each kind of agility is enhanced by a distinct set of assets and leadership priorities.

Absorption, exemplified by Foreman, is the strength to withstand punishment and weather sudden shifts. Sull describes 10 ways that companies can build absorption, including capitalizing on size, diversifying assets, and stockpiling a war chest of cash.

Balancing agility and absorption is critical. Apple’s iPod is an excellent example of agility, but it was absorption—in the form of a small core of fanatical customers—that kept the company going during the 1990s, when its market share shrank dramatically. Those customers kept Apple alive until changes in context created its golden opportunity.

Ali won the Rumble by maintaining his agility while enhancing his absorption. Companies that follow his lead and cultivate both capabilities increase their chances of emerging from turbulence as new market leaders.

Elizabeth Warren and Amelia Tyagi argue that consumer credit should be made as safe as any other product. Paul Collier and Jean-Louis Warnholz reveal an increasingly investment-friendly climate in sub-Saharan Africa. Amy J.C. Cuddy asserts that warmth and competence are not mutually exclusive. John Sviokla predicts a surge of peer-to-peer lending in the wake of the financial crisis. Noah J. Goldstein demonstrates the power of social pressure in guiding customers’ behavior. Raymond Fisman urges the creation of a global forensic economics lab modeled on Interpol. Paul Saffo warns of a brain drain out of the United States. Janine M. Benyus and Gunter Pauli illustrate the advantages of innovation copied from nature. Peter Schwartz dispels the illusion that global temperatures are actually falling. Nicholas A. Christakis shows that personal influence dissipates beyond three degrees of separation. Michael I. Norton observes that an investment of effort can lead to unduly glorifying its results. Marcelo Suarez-Orozco identifies the migrant millions as untapped brand emissaries to their relatives back home. Ian Bremmer and Juan Pujadas chart the growing influence of state capitalism in four industry sectors. Steve Jurvetson shares a fun way to stimulate the growth of new brain cells. Lew McCreary spotlights the death-defying interior designs of two adventuresome architects who aim to counteract the degenerative effects of physical comfort. Tom Ilube explains the semantic web—a quiet revolution in technology that will radically change the internet. Alex Pentland considers the benefits of combining two distinct kinds of social networking. Thomas H. Davenport and Bala Iyer look at the offshore outsourcing of decision making. Gurdeep Singh Pall and Rita Gunther McGrath contemplate the ramifications of immortalizing business meetings in searchable, high-quality digital video. R. Stanley Williams envisions a central nervous system for the earth.

HBR Case Study

Josh Lewis, a young staffer at Rising Entertainment, is frustrated because his boss, marketing chief Sarah Bennett, won’t listen to his ideas about using new media to promote films. She’s trapped in the 1990s, he thinks, when people actually watched network TV! Rushing through his assignment for a team presentation, he works up a plan and pitches it to the CEO in the hallway. The CEO loves it, but Sarah is upset with Josh for going over her head—and submitting subpar work on the presentation. How can these members of two different generations work together effectively?

Clashes between impatient Generation Y and pay-your-dues Generation X are inevitable but certainly manageable, says Ron Alsop, author of The Trophy Kids Grow Up. For starters, Sarah should reprimand Josh for bypassing her; he should respect her authority and work with her, not around her. But Sarah must address Josh’s frustrations. Like many Gen Yers, he wants to know that his work is meaningful, and he needs constructive feedback on suggestions.

Enterprise Rent-A-Car president Pamela Nicholson says that given the CEO’s enthusiasm, Sarah should commend Josh’s initiative but remind him to keep her in the loop. Sarah and Josh also might be able to forge a more productive relationship if Rising Entertainment set up training and feedback programs to help integrate Gen Yers into the workforce, as Enterprise has.

Jim Miller, an executive VP at General Tool & Supply, thinks Josh put his team in jeopardy by doing his assigned tasks poorly. Sarah needs to coach him on being a team player and set clear expectations about performance and communication. However, she could have done a much better job of validating his good idea—perhaps by asking him to spearhead some experiments for the group.

HBR at Large

In May 2008, a group of management scholars and senior executives worked to define an agenda for management during the next 100 years. The so-called renegade brigade, led by Gary Hamel, included academics, such as C.K. Prahalad, Peter Senge, and Jeffrey Pfeffer; new-age thinkers, like James Surowiecki; and progressive CEOs, such as Whole Foods’ John Mackey, W.L. Gore’s Terri Kelly, and IDEO’s Tim Brown. What drew them together was a set of shared beliefs about the importance of management and a sense of urgency about reinventing it for a new era.

The group’s first task was to compile a roster of challenges that would focus the energies of management innovators around the world. Accordingly, in this article, Hamel (who has set up the Management Lab, a research organization devoted to management innovation) outlines 25 “moon shots”—ambitious goals that managers should strive to achieve and in the process create Management 2.0.

Topping the list is the imperative of extending management’s responsibilities beyond just creating shareholder value. To do so will require both reconstructing the field’s philosophical foundations so that work serves a higher purpose and fully embedding the ideas of community and citizenship into organizations. A number of challenges focus on ameliorating the toxic effects of hierarchy. Others focus on better ways to unleash creativity and capitalize on employees’ passions. Still others seek to transcend the limitations of traditional patterns of management thinking.

Not all the moon shots are new, but many tackle issues that are endemic in large organizations. Their purpose is to inspire new solutions to long-simmering problems by making every company as genuinely human as the people who work there.

Managing Yourself

Although most managers can recognize an off-kilter leader (consider the highly supportive boss who cuts people too much slack), it’s quite difficult to see overkill in yourself. Unfortunately, that’s where leadership development tools such as 360-degree surveys fail to deliver, say Kaplan and Kaiser. Dividing qualities into “strengths” and “weaknesses” and rating them on a five-point scale will not account for strengths overplayed. The authors suggest several strategies, based on their years of consulting experience and research, for figuring out which attributes you’ve employed to excess and adjusting your behavior accordingly.

Strengths taken too far have two consequences: First, they become weaknesses. For instance, quick-wittedness can turn into impatience with others. Second, you’re at risk of becoming extremely lopsided—that is, diminishing your capacity on the opposite pole. A leader who is very good at building consensus, for example, may take too long to move into action.

To strike a balance between two key leadership dualities—forceful versus enabling, and strategic versus operational—you need to see your actions and motivations clearly. That’s no easy task since most leadership development tools don’t spell out that you’re overdoing your strengths. But there are other ways to bring that information to light. You can start with a review of the highest ratings on your most recent 360 report. Ask yourself: Is this too much of a good thing? Another technique is to make a list of the traits you most want to have as a leader. Are you going to extremes with any of them? To check for lopsidedness, you can prompt feedback from other people with a list of qualities you’ve composed or one you’ve gleaned from other sources. Once you know which attributes you’re overdoing, you can recalibrate.